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In the state budget brought down yesterday there are 2
important measures that will affect property owners and buyers.
Abolition of stamp duty
on mortgages
From 1st September 2007 – for all owner
occupiers of residential property
From 1st July 2008 – for all other owners/buyers
of residential property
From 1st July 2009- for all other owners/buyers
of other property (commercial etc.)
A typical saving is $1,941.00 on a $500,000 mortgage.
There are 2 important points to bear in mind with these
changes:
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The exemptions only apply to “natural persons” – not
companies or trusts
-
The exemptions apply
to the “purpose of the loan” – not the property being
mortgaged. This means that, prior to 1 July 2008, full
stamp duty will be payable on a mortgage to buy investment
property – even if the security offered is the person’s own home.
Reduction of rate of
Land Tax
The Land Tax rate will be reduced from 1.7% to 1.6% - of
the unimproved value of property. The threshold remains at approximately
$350,000.00.
The government has reaped an additional $295m from
Land Tax – and handed back a mere $115m – by tinkering with the rate applied.
Land tax will continue to be a major disincentive for
investment in New South Wales – in particular, (non-strata) residential
property.
Consider this example. We recently had a client who sold a
house for $1,370,000. It was previously the family home and only became an
“investment” after the owner moved interstate.
The rental income is $735.00 per week – giving a gross
return of 2.8% (not great!). However, after the deduction of rates, taxes and
management fees (which includes land tax of $9,250.00) this return drops to a
mere 1.8%.
Even at the new rate the amount of Land Tax would still be
$8,700.00 (12 week’s rent!) and that assumes no increase in the land value!
Who would purchase a property with such a miserly
return?
The answer is, probably no-one – unless there are other
reasons to expect significant capital gains. These gains would have to be
really significant, given that the cash loss on such an investment (if all
the funds are borrowed) can be anything up to $80,000 EACH YEAR!!
In fact, in this case, the only reason why our client got
caught was because she already owned the property and was not aware of the Land
Tax trap before deciding to defer the sale.
I do not think the Land Tax changes will have any impact on
the property market at all and the government will continue to skim the cream of
this lucrative source of revenue.
WHAT TO DO ABOUT THESE
CHANGES
I am writing today to let you know of our recommended
strategies to extract the maximum benefit from these measures.
Firstly, the stamp duty exemption for home owners. The
abolition of stamp duty takes effect from 1st September 2007. The
obvious tactic here is to defer any settlement until after this date.
This does not mean that an actual purchase (exchange of contracts) cannot take
place in the meantime. The critical point here is to make sure that the
settlement date is set after 1st September 2007. This will allow sufficient time
for the mortgage to be stamped (exempt) and then settlement arrangements made.
Secondly, the exemption for (loans to acquire) investment
properties. If the property being acquired is “residential” then the exemption
will apply after 1st July 2008. For some time now I have been
recommending that the time is now right to selectively purchase good residential
property – in particular, offering a good return. One would expect the
investment market to continue to be subdued until the stamp duty exemption comes
into effect next year. This, I believe, will present an extended period to
select appropriate properties for acquisition. Clearly, it would not be easy to
negotiate a purchase now – with a settlement after 1st July 2008.
But, as we draw closer to that date this will become a factor in negotiations
for purchase.
Further information can be obtained from the Office of
State Revenue web-site. Follow this link:
http://www.osr.nsw.gov.au/portal/page?_pageid=33,733756&_dad=portal&_schema=OSRPTLT
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1800 678 462